Van Rompuy: Make ESM a Bank

Ideas that have been bubbling around Brussels for some time have found their way into the report Herman Van Rompuy, the European Union president, sent to member states today to prepare them for discussions at their latest make-or-break summit to save the euro later this week.

The five-page report, sent a day before a letter from German Chancellor Angela Merkel and French President Nicolas Sarkozy is due to arrive in Mr. Van Rompuy’s office, suggests the euro zone’s permanent bailout fund “have the necessary features of a credit institution.” It doesn’t go into what these features are, but one is presumably access to finance from the European Central Bank.

It also says the European Stability Mechanism, as the permanent successor to the existing European Financial Stability Facility will be known, should be adjusted so that it can recapitalize banks directly—instead of lending only to governments (which they may then onlend to banks.)

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It also suggests that the €500 billion total limit of the ESM and EFSF should be lifted. The idea would be to allow the ESM to reach €500 billion that size on its own–before the EFSF is wound down. That doesn’t mean the two funds will lend side-by-side—EFSF lending will stop when the ESM kicks in–just that the prior lending of the EFSF won’t constrain the size of the ESM. (* See update below.)

On the question of “private-sector involvement”—the euphemism for forcing write-downs on private creditors—the report says the ESM should strictly adhere to “well-established IMF principles and practices.”

This would reaffirm that Greece is “unique and exceptional” in requiring bondholders to take losses, it says. (In fact, “IMF principles and practices” certainly don’t mean that no other euro-zone government can ever default.)

The report says that unlike the EFSF, the ESM shouldn’t require unanimity for every decision. (This would conveniently avoid every decision being subject to veto by small member states.)

On what to do to tighten budget rules, the report is as interesting for what it doesn’t discuss as for what it does. For example, it ignores completely the idea of an intergovernmental agreement among the 17 euro-zone states—an approach some lawyers in Brussels say is problematic. (They say EU governments can’t make separate pacts among themselves about issues already covered in the EU treaty, and argue that European institutions cannot enforce such pacts.)

Instead, it suggests an approach that could be agreed in the short-term, followed by possible treaty changes that would be more time-consuming and require ratification by national parliaments. Such short-term action could be agreed by a unanimous vote of the 27 governments, wouldn’t require time-consuming and risky ratifications in national parliaments.

The idea is not to change the treaty itself—but one of the annexes, so-called Protocol 12, which explains the so-called excessive deficit procedures. Inside Protocol 12, euro-zone governments would commit to balanced-budget amendments to their constitutions—with the European Court of Justice ruling on compliance–and to reduce their debt to 60% of gross domestic product. They’d agree, among other things, to inform other members of the euro zone before they issued any debt.

*I’ve since talked to officials who say this could mean several things, including the possibility of them lending side-by-side. It probably doesn’t mean that the EFSF will enter into new commitments after the ESM comes into being, however. A senior German official said the combined firepower of the two funds “will in no circumstances exceed the ceiling of €500 billion.”

Comments (4 of 4)

European Countries must determine their own fate. As usual, the European Commission doesn't like the
European solution but, more adversely favors the Chinese one. As author of the original ESSF plan
in the US Treasury Department it is important that you decide not hesitate or procrastenate on the matter.
DECIDE QUICKLY.

9:25 am December 8, 2011

Anonymous is wrong wrote:

1:08 pm December 7, 2011
Anonymous wrote:
Do you know who van Rompuy is by profession? He is…. are you ready for this? … a poet.

Anonymous,

You are mistaken.

He's not, he's an economist and ex-finance minister and prime minister, who occasionally dabbles in poetry, as a hobby... but never professionally.

1:08 pm December 7, 2011

Anonymous wrote:

Do you know who van Rompuy is by profession? He is.... are you ready for this? ... a poet.

10:02 am December 7, 2011

TAWANG wrote:

WERE YOU A GERMAN..........

Were you a German, what you most care about -- debt-laden You,or tax-laden I ?

German will pay no money to push anyone out of Euro zone.

German will pay no money to pull anyone stay in Euro zone.

German will pay no money to promote Fisical union.

German will pay no money to hinder Fisical union.

German will pay no money to strengthen ECB.

German will pay no money to weaken ECB.

For German, Euro problem is such a problem--they can not speak out their answer as follows:

Ask not what German can do for you. Ask what you can do for your country's debt.
The less I pay for your own existed debt, the more I can prepare for my own coming troubles.

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The Wall Street Journal’s Brussels blog is produced by the Brussels bureau of The Wall Street Journal and Dow Jones Newswires. The bureau has been headed since 2009 by Stephen Fidler, who was previously a correspondent and editor for the Financial Times and Reuters. Also posting regularly: Matthew Dalton, Viktoria Dendrinou, Tom Fairless, Naftali Bendavid, Laurence Norman, Gabriele Steinhauser and Valentina Pop.